“The Fed’s decision was unanimous and Chairwoman Janet Yellen emphasized that the central bank would raise rates gradually.”
Great, the “when will the next rate rise be” game will continue to be played. As the charts show, tightening was already “baked in”, and will likely continue going forward. The markets weren´t at all surprised!
First, NGDP growth (Monthly NGDP from Macroeconomic Advisers)
10-year inflation expectations
The dollar against a broad basket of currencies
Industrial production
PS Likely outcome: Sooner, rather than later, the Fed will bring rates back down! At that point FOMCers will raise their hands and say “We give up!”
This post is true. Time for some stiff drinks.
I agree at some point the FOMC will have to undo its rate increase. My fear is by the time they realize that a tightening of policy was a mistake, the natural rate of interest will have been pushed down to a point such that returning the fed funds rate to a 0 to .25% range will not stop the damage. Even if the Fed turns to negative IOR to try to compensate, I fear they’ll stay behind the curve of where they need to be to get the fed funds rate below the natural rate. I will grant that my fear comes from a distrust in the competence of the FOMC but the FOMC has not given me any reason to trust their competence.
When they realize their incompetence, they´ll “give up”!
Please Marcus, looking at market reactions. Many markets coherent with your view but how interpret equity market ?
Luigi, An addition to the Statement (between brackets), which could be seen as bullish for stocks.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, (and it anticipates doing so until normalization of the level of the federal funds rate is well under way.)This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Thanks Marcus,…Great Book!!! Probably I succeeded in converting an austerian.
All markets had more or less anticipated the move. The verbiage was much more important, and there was nothing newly bad in that. So a bit of a relief rally. The gradual tightening continues as it has for a year or more. And that is likely to boost the dollar, lower yields and weigh on stocks over time.
When the economy will show clear signs of slowing down (even moreso), I highly doubt that the Fed will admit that monetary tightening had anything to do with it. Look at the central bankers that tightened in 2010-2011 all accross the world: they are still claiming that it was the right thing to do.
They will blame some “structural factor”. Or perhaps, if the stock market crashes (or house prices decline), they will blame that. Others will blame the Fed for leaving the punchbowl out for too long and creating “imbalances” in the economy.
But maybe, just maybe, a few more people will be convinced that MMs, Svensson and Krugman were right. The world could use a few more people like Kuroda and Kocherlakota.
LK, and when you read Selgin on Bernanke, you come to realize Bernanke´s research on the Greatr Depression was for naught…or maybe was seen as only a way to tenure!
http://www.alt-m.org/2015/12/17/interest-on-reserves/
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